Basics of Futures and Options – Day 3

Options are traded in the Indian markets for over 15 years
An Option is a tool for protecting your position and reducing risk
A buyer of the call option has the right and the seller has an obligation to make delivery
The option is only given to one party in the transaction ( buyer of an option)
The option seller is also called the option writer
At the time of agreement the option buyer pays a certain amount to the option seller, this is called the ‘Premium’ amount
The agreement happens at a pre specified price, often called the ‘Strike Price’
The option buyer benefits only if the price of the asset increases higher than the strike price
If the asset price stays at or below the strike, the buyer does not benefit, for this reason it always makes sense to buy options when you expect the price to increase
Statistically the option seller has higher odds of winning in an typical option contract
The directional view has to pan out before the expiry date, else the option will expire worthless